ZTE: Zigzagging to Escape

Old-time movie buffs will remember The Perils of Pauline, the silent serial in which our titular heroine faced successive dangers but made it through in the end. The Perils of ZTE doesn’t have quite the same ring. For now, at least, that company has managed its own escape from impending doom.

The Commerce Department just announced a deal under which ZTE may be removed from the Denied Persons List. The press release lists the highlights:

ZTE must pay $1 billion and place an additional $400 million in suspended penalty money in escrow before BIS will remove ZTE from the Denied Persons List. These penalties are in addition to the $892 million in penalties ZTE has already paid to the U.S government under the March 2017 settlement agreement.

ZTE will also be required by the new agreement to retain a team of special compliance coordinators selected by and answerable to BIS for a period of 10 years. Their function will be to monitor on a real-time basis ZTE’s compliance with U.S. export control laws. This is the first time BIS has achieved such stringent compliance measures in any case. ZTE is also required under the new agreement to replace the entire board of directors and senior leadership for both entities. Finally, the new agreement once again imposes a denial order that is suspended, this time for 10 years, which BIS can activate in the event of additional violations during the ten-year probationary period. These collectively are the most severe penalty BIS has ever imposed on a company.

While those are onerous terms, they sure beat the alternative, bleak future that ZTE would otherwise face.

I find this case to be fascinating, for a number of reasons. ZTE had engaged in a massive and deliberate scheme to evade U.S. export controls and sanctions; violations were a feature, not a bug, of the company’s business model. Apparently not suitable chastened by the resulting record penalty imposed by the Bureau of Industry and Security, the company then failed to meet some of the terms of the settlement agreement under which it was removed from the Entity List.

Now, I consider ZTE’s recent designation on the Denied Persons List to arguably be an overreaction, since BIS did not accuse the company of resuming substantive export controls and sanctions violations. Nevertheless, since BIS had the authority to deploy that nuclear option, ZTE should have been more diligent in meeting all the terms of the settlement agreement.

ZTE was not, however, the only “victim” of its inadequate compliance. Its U.S. suppliers suffered the adverse impact of losing an important customer. It wouldn’t surprise me if this played a behind-the-scenes role in the restoration of ZTE’s export privileges. The episode demonstrates how interconnected the international supply chain really is, and that foreign buyers and reexporters of U.S.-origin products are bound by the same rules as exporters from the United States.

As the press release points out, the embedded, independent compliance team requirement is a first for BIS, though it’s similar to the approach that the State Department uses for egregious violations of the International Traffic in Arms Regulations. I wonder whether we’ll see more such arrangements in future BIS settlement agreements.

Back to The Perils of Pauline. While it may have pioneered the cliffhanger ending, to get the audience to return for the next installment, that approach has been successfully adopted for most “reality” television shows. Is it possible that the erstwhile host of The Apprentice had something like this in mind all along as a ratings booster?

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About George W. Thompson

George W. Thompson specializes in export and import regulation and international business counseling. He is an Adjunct Professor at George Mason University School of Policy, Government, and International Affairs. He has written several important works on international trade including "Transnational Contracts" published by Thomson Reuters, "Intellectual Property Rights and United States International Trade Laws" (co-Author) published by Oceana Publications, and "Exporting: Regulations, Documentation, Procedures" published by the Global Training Center.

He can be reached by email at gwt@gwthompsonlaw.com or by phone at 202-772-2039. His office address is Thompson & Associates, PLLC,1050 Connecticut Avenue NW, Suite 500, Washington, DC 20036.